Tag Archives: etfs

Valuation Dashboard By Industries: Energy And Materials, October 2015

Summary 4 key fundamental factors are reported across industries in Energy and Basic Materials. They can be used to assess the valuation status of an industry relative to its historical average. They can also be used as a reference for picking quality stocks at a reasonable value. I started in September 2015 a monthly series of articles giving a valuation dashboard by sector of companies in the S&P 500 index (NYSEARCA: SPY ). The idea is to follow up a certain number of fundamental factors for every sector, to compare them to historical averages. This article is the first one of another series going down at industry level in the GICS classification. It covers Energy and Basic Materials. The choice of the fundamental ratios used in this study has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no due diligence, analysis, recommendations, or lists of individual stocks to consider. To make a complete picture by sticking a “bottom-up” under the “top-down”, you have to navigate in articles written by industry experts. Here is the link to articles tagged by sector. Methodology Four industry factors calculated by portfolio123 are extracted from the database: Price/Earnings “P/E”, Price to sales “P/S”, Price to free cash flow “P/FCF”, Return on Equity “ROE”. They are compared with their own historical averages “Avg”. The difference is measured in percentage and named with a prefix “D-” before the factor’s name (for example “D-P/E” for the price/earnings ratio). The methodology is quite different from the S&P 500 dashboard. In some industries, S&P 500 companies are very few, so mid- and small caps are included here. Also, the fundamental industry factors are not median values, but proprietary data by the platform. The calculation aims at eliminating extreme values and size biases, which is necessary when going out of a large cap universe. The drawback is that these factors are not representative of capital-weighted indices. They may be very useful as a reference values for picking stocks in an industry, but are less relevant for ETF investors. Industry valuation table on 10/26/2015 The next table reports the 4 industry factors. For each factor, the next “Avg” column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference between the historical average and the current value, in percentage. So there are 3 columns relative to P/E, and also 3 for each ratio.   P/E Avg D- P/E P/S Avg D- P/S P/FCF Avg D- P/FCF ROE Avg D-ROE Energy Equip. & Services 17.2 24.2 28.93% 0.81 1.73 53.18% 10.58 35.34 70.06% -6.2 7.34 -184.47% Oil/Gas/Fuel 19.65 18.53 -6.04% 2.06 3.35 38.51% 20.11 29.03 30.73% -6.59 4.47 -247.43% Chemicals 19.61 18.48 -6.11% 1.46 1.21 -20.66% 34.93 25.37 -37.68% 8.68 6.74 28.78% Constr. Materials 34.81 21.44 -62.36% 1.33 1.16 -14.66% 65.74 40.5 -62.32% 12.38 5.77 114.56% Packaging 20.11 17.96 -11.97% 0.91 0.61 -49.18% 21.67 20.09 -7.86% 18.77 8.34 125.06% Metals&Mining 21.49 19.83 -8.37% 1.55 2.65 41.51% 16.77 25.53 34.31% -19.32 -8.6 -124.65% Paper&Wood 26.08 21.27 -22.61% 0.75 0.72 -4.17% 20.16 22.81 11.62% 9.09 4.99 82.16% Valuation The following charts give an idea of the current status of Energy and Materials industries relative to their historical average. In all cases, the higher the better. Price/Earnings: Price/Sales: Price/Free Cash Flow: Quality Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF in Materials (NYSEARCA: XLB ) and Energy (NYSEARCA: XLE ) with SPY. (click to enlarge) Conclusion Both sectors are in a downtrend, in absolute and relative to the broad market. At the industry level, Energy Equipment & Services, Oil/Fuel/Gas and Metals/Mining look undervalued relative to their own historical averages for several factors, but they are in negative territory for quality. At the opposite, Chemicals, Construction Materials and Packaging are above their historical average in quality, but overpriced for the 3 valuation factors. No industry in these two sectors looks very attractive. However, comparing individual fundamental factors to the industry factors provided in the table may help find quality stocks at a reasonable price. A list of stocks in energy and basic materials beating their industry factors is provided on this page . If you want to stay informed of my updates on this topic and other articles, click the “Follow” tab at the top of this article. You can choose the “real-time” option if you want to be instantly notified.

4 Top-Rated Short-Term Government Bond Mutual Funds For Steady Yield

A short-term government bond fund is a mutual fund that’s limited, by its investment objectives and fund bylaws, to investing primarily in short-term obligations of the federal government or its agencies. Depending on the fund’s definition, short term can be up to five years. Meanwhile, mutual funds investing in government debt securities are among the most secure investment options which provide regular income while protecting the capital invested. Funds which are part of this category bring a great deal of stability to portfolios with a large proportion of equity, while providing dividends more frequently than individual bonds. Hence, they are considered to be the safest in the bond fund category and are ideal options for the risk-averse investor. Below we will share with you 4 top-rated short-term government bond mutual funds. Each has earned a Zacks Mutual Fund #1 Rank (Strong Buy) as we expect these mutual funds to outperform their peers in the future. Fidelity Spartan Short Term Trust Bond Index Fund (MUTF: FSBIX ) invests a major portion of its assets in securities included in the Barclays U.S. 1-5 Year Treasury Bond Index. FSBIX uses statistical tools such as duration, maturity, interest rate sensitivity, security structure, and credit quality to imitate the returns of the index. The Fidelity Spartan Short Term Trust Bond Index Fund returned 1.1% in the last one year. FSBIX has an expense ratio of 0.20% as compared to a category average of 0.80%. Vanguard Short Term Treasury Fund (MUTF: VFISX ) seeks current income with minimum price volatility. VFISX invests a large share of its assets in U.S. Treasury instruments such as bills, bonds, and notes. VFISX seeks to maintain a dollar-weighted average maturity between 1 and 4 years. The Vanguard Short Term Treasury Fund returned 0.9% in the last one year. Gemma Wright-Casparius is the fund manager and has managed VFISX since January 2015. JPMorgan Short Duration Bond Fund A (MUTF: OGLVX ) invests a large portion of its assets in investment grade debt securities having short-to-intermediate maturities. These include U.S. government obligations, and mortgage-backed and asset-backed securities. OGLVX selects individual securities on the basis of a risk/reward analysis, including an evaluation of interest rate risk, credit risk, and the legal and technical structure of the transaction. OGLVX offers dividends monthly and capital gains annually. The JPMorgan Short Duration Bond Fund A returned 0.4% in the last one year. As of August 2015, OGLVX held 1636 issues, with 2.85% of its total assets invested in US Treasury Note 0.625% Oppenheimer Limited-Term Government Fund A (MUTF: OPGVX ) seeks current income. OPGVX invests the majority of its assets in debt securities issued by the U.S. government. OPGVX may also invest a maximum 20% of its assets in mortgage-backed securities, which are not issued by the U.S. government. OPGVX aims to maintain an average effective portfolio duration of a maximum of three years. The Oppenheimer Limited-Term Government Fund A returned 0.8% in the last one year. Peter A. Strzalkowski is the fund manager and has managed OPGVX since April 2009. Original Post

A Critic Of Valuation-Informed Indexing Offers A Concise Case For Why Buy And Hold Is Superior

By Rob Bennett There’s only one difference between Buy and Hold and Valuation-Informed Indexing. Both are numbers-based strategies rooted in peer-reviewed research. The difference is that Valuation-Informed Indexers always make adjustments for valuation levels (believing, as Shiller showed in 1981, that valuations affect long-term returns) while Buy and Holders never do (believing that the market is efficient and that, thus, the market can never be overpriced or underpriced). I thought that this week I would present here a concise and clear and simple and sincere case for Buy and Hold that one of my critics posted as a comment at my site. Then I’ll offer my response to his words. To me, as a self-described ACTUAL Buy-n-holder, it’s this simple: Markets tend to go up over time. Ownership of common stocks have proven to be the best way for an average person to participate in, and profit from this ongoing economic growth. It has proven impossible to determine which particular stocks will outperform, or when they might do so. Buying, and then holding a market basket of ALL stocks that constitute the market, on a regular and recurring basis, without respect to ‘timing’, removes the uncertainty of guessing which particular stocks will be best, or which is the best time to purchase them. That’s it. People can refine, add gimmicks, accessories, etc., or even purposefully misconstrue (AHEM, looking at YOU, Rob!) but to me, THIS is the essence of buying and holding. So, for you to go on a decades long intense daily public jihad against those principles, and the people who espouse, and apply them, seems frankly… well, insane. You are free to use whatever market timing scheme, or other method you chose to invest, or course. But for you to characterize the above technique as “Get Rich Quick,” just to irk people and to hopefully draw attention to yourself, shows how both intellectually feeble, and also morally challenged you are. (I dare you to publish this.) Is it a “gimmick” to consider valuations when making decisions as to what stock allocation to go with at a particular time? I don’t think so. The research shows that the long-term return earned by an investor changes with changes in valuations. That means that stock investing risk is variable rather than constant. It follows that an investor seeking to keep his risk profile roughly constant MUST change his stock allocation in response to big valuation shifts. Why do the Buy-and-Holders have such a hard time with this idea? It’s because they start with an assumption that the market is efficient. That’s another way of saying that the investors who set the market price are rational. Is it? Are they? I don’t think so. I have engaged in discussions with tens of thousands of investors over the years. I certainly have seen many rational arguments advanced. But I have also seen many emotional arguments advanced. If investors are as emotional when making decisions as to their stock allocations as they are when presenting arguments on internet discussion boards, I think it would be fair to say that it would be dangerous to assume that the stock market is priced rationally. That said, I believe that the market in the long term really does set prices properly. It has to. The purpose of a market is to get prices right. In the long term, the stock market is like all other markets. But in the short term, it is not. That makes all the difference. Take a look at the disparity between the irrational price that applies today and the rational price that applies in the long term and you know in which direction prices will be headed over the next 10 years or so. It always works. We have 145 years of stock market history available to us. For that entire time period, investors have been able to effectively predict the price that will apply in 10 years by looking at the price that applies today. That’s amazing. That changes our understanding of how stock investing works in a far-reaching way. It means that, when prices go up by more than the 6.5 percent gain justified by the economic realities, we are collectively borrowing from our future selves to fool ourselves into thinking that we are richer than we really are today. That causes devastating problems down the line. Investors cannot plan their financial futures effectively if they believe numbers on their portfolio statements that do not reflect the long-term realities. And the bear market that must follow a bull market causes an economic crisis as trillions of dollars in pretend wealth disappears, causing hundreds of thousands of businesses to fail and millions of workers to lose their jobs. For numbers-based strategies to work, it is critical that we get the numbers right. And, if Shiller is right that valuations affect long-term returns, it is impossible for Buy-and-Holders – who do not make adjustments for valuations – to get any of the numbers right. The valuations factor is not a small factor. It is huge. A regression analysis of the historical data shows that the most likely annualized 10-year return in 1982 was 15 percent real but that the same number was a negative 1 percent in 2000. Yowsa! The bad news is that it is very hard for Buy-and-Holders to accept these realities. They have staked their lives on the old understanding of how stock investing works. The good news is that Shiller’s “revolutionary” (his word) findings change things in a highly positive way. If we can effectively predict long-term stock returns, stocks are not nearly as risky an asset class as we have long believed them to be. Perhaps I am wrong. But, if I am right, the future of stock investing will be a lot better for all of us than anything that we have seen or even dared to hope for in the past. Disclosure: None.